New Lending Rules Should Not Affect Down Payments in 2014

In recent weeks, we have received many questions about the new lending rules scheduled to take effect in January 2014. There appears to be a common misconception that the new rules will bring mandatory down payments for borrowers. But that is not the case.

The forthcoming lending changes should not have a direct effect on down-payment requirements in 2014. Nor will they impose a mandatory down payment of 20%, as many people believe. In 2014, as in past years, loan-to-value ratios (and their inverse, the down payment) will primarily be influenced by the mortgage insurance industry and the business practices of individual lenders. It is highly unlikely the federal government will impose any minimum down-payment requirements on borrowers in 2014.

Now that we’ve addressed the rumors, let’s trace them back to their source.

Vaguely Defined ‘QRM’ Rule the Source of Much Speculation

The idea of a mandatory 20% down payment can be traced back to 2011, when it was part of a preliminary proposal for the forthcoming Qualified Residential Mortgage (QRM) rule.

QRM is part of a new group of lending rule changes brought on by the housing collapse and required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The QRM rule, which has yet to be finalized, is currently being aligned with the similar sounding Qualified Mortgage (QM) rule. The QM rule was finalized earlier this year and takes effect on January 10, 2014. The exact definition of QRM is still pending.

Here’s what you should know about these two lending rules, at this stage:

QM is a mortgage rule that protects lenders from lawsuits if they generate “safe” loans that meet a certain set of parameters.

The QRM rule allows lenders to sell loans into the secondary mortgage market without restriction, as long as those loans meet the same set of quality parameters.

While they could have far-reaching effects, neither of these lending changes imposes a minimum down-payment requirement for borrowers in 2014. At least not in their current forms.

Final Lending Rule Due in 2014, Probably Without a Down-Payment Requirement

The QM rule has already been finalized and does not impose any sort of minimum down payment. No worries there. The QRM rule, on the other hand, is still up in the air. But at this stage, it seems unlikely the QRM lending rule will include any down-payment requirement.

This all began about three years ago. In March 2011, the Federal Deposit Insurance Corporation (FDIC) issued a “Notice of Proposed Rulemaking.” It included a minimum down-payment requirement as part of the Qualified Residential Mortgage (QRM) rule.

The FDIC’s notice stated the following:

“If a mortgage transaction is for the purchase of a one-to-four family property, then the proposed [QRM] rules require that the borrower provide a cash down payment in an amount equal to at least the sum of … 20 percent” of the purchase price or the current market value, whichever is less.

But this was only a proposal — not an implementation. The down-payment requirement written into this proposal drew a firestorm of criticism from many groups, ranging from industry lobbyists to nonprofit consumer advocates. Some members of Congress even protested it. As a result, the proposed 20% down-payment rule is unlikely to emerge in 2014.

Regulators Acknowledge Universal Unpopularity of 20% Proposal

More recently, in August 2013, the FDIC issued a “request for comment” on their latest QRM proposal. The FDIC is one of several housing and financial agencies working together to finalize the new lending rule.

Here are some relevant excerpts from that document:

“… many members of Congress commented that the proposed 20 percent down payment requirement was inconsistent with legislative intent, and strongly urged the agencies to eliminate or modify the down payment requirement.”

“Many of these [people and organizations commenting on the rule] asserted that the proposed definition of QRM, particularly the 20 percent down payment requirement, would significantly increase the costs of credit for most home buyers and restrict access to credit.”

“The other strong element of concern [among those commenting on the proposed changes] was that the original proposal’s 20 percent purchase down payment requirement may have become a de facto market-wide standard, with harsh consequences” for borrowers who are unable to accumulate such a sum.

Groups opposing the down-payment requirements are once more weighing in. The American Bankers Association (ABA), for example, sent a letter to financial regulators in October 2013 to express concerns over the original 20% down-payment requirement, and a more rigid 30% requirement that was floated in August 2013. According to the ABA’s letter: “a 20 percent down payment would result in between 14.5 percent and 20 percent of borrowers being ineligible for a QRM loan.”

The jury is still out on all of this. The QRM lending rule has yet to be finalized. Federal financial regulators are still reviewing comments and feedback. They expect to have a final definition of the latest rule at the start of 2014. But given what we have seen so far, the next round of lending changes probably won’t include a minimum down-payment requirement.